In the era of globalization, businesses are expanding in the form of Mergers & Acquisition transactions, acquisition is a frequent sight but before the definitive agreements are drafted, the parties write down the preliminary agreement in the term sheet, which is also called ‘letter of intent’. The Term Sheet contains the terms and conditions which are agreed during the initial discussion stage and subsequently those terms and conditions are integrated into the definitive agreements.
Term Sheet is an important document to be signed as it reflects the conclusion of initial commercial negotiations and illustrates the principle terms which are settled between the parties and the agreement is signed to show the eagerness of the parties to enter into transaction and after the signature to the Term Sheet, parties incur substantial cost towards execution of the deal, which includes conducting due diligence process, drafting of definitive agreements, etc.
The Term Sheet contains the following terms: –
Clauses which are generally non-binding until unless expressly stated in the Term Sheet
| Recital | Recital state the name, execution date, purpose of the transaction, prospect parties, and occasionally contain statement reciting the binding clauses of the document. |
| Companies’ information
|
All the information related to the targeted company, i.e., the name, value, investor involved in the potential agreement along with the list of holding and subsidiary companies are given. |
| Type of securities offered | Sometimes the TS contains the type of securities offered to the investor. i.e. equity share or preference share. Further, any other form of security purchased by the investors is also included. |
| Valuation | Valuation provides an estimate of what the company is worthy of as an investment opportunity |
| Board of directors
|
This clause shows the investor’s representation in the company’s Board of Directors and shows the proportion of seats under the investor’s control. Further, it shows whether the investor is a voting or non-voting member |
| Proposed transaction | This clause states the investment amount which the investor proposes to invest along with the post-investment shareholding pattern of the company. |
| Liquidation | The liquidation clause states the mode of liquidation the company wants to opt for, the investor can choose to opt for IBC[1] or some other mode. |
| Exit mechanism | The right to exit is equally important for the investor along with the right to entry. Thus, the exit mechanism in the TS provides for the ways the investor can exit from the company. The exit mechanism includes varieties of options which investors can choose:
A) Initial public offering B) strategic sale of equity shares C)Drag along option |
| Purchase price | This clause shall include the initial purchase price, preferred payment mode, any elements which are not part of the purchase price. |
| Voting rights | Some companies choose to include a term for the voting rights in the TS to explain, how much the company’s direction is overseen by investors and to determine the amount of interference that can be done by the investor, whether they have the voting right or not. This clause is important to see on what critical matter the investors have a say. |
Clauses that are generally binding in the Term Sheet.
| Confidentiality | It prohibits the parties to disclose the term of discussion and other important facts out in the public domain, as it may influence the share price and may impact the overall market. Sometimes companies prefer to make detailed non-disclosure agreements (NDA), this depends on the industry-specific. |
| Exclusivity period | This clause works as a safeguard to the interest of buyer and seller where the company and its promoter after signing the TS are restricted for 30-90 days to discuss or negotiate with any other third party. Thus, this clause gives due importance to the interest of buyers who meanwhile incur expenses to conduct due diligence. |
| Dispute resolution | This clause states the choice of mode parties want to opt to resolve the dispute. |
The Term Sheet can be binding or non-binding but usually, it is not binding except for certain clauses, which are specifically stated to be binding. The binding nature of the Term Sheet shall be determined by two factors such as the intention of the parties along with the totality of circumstances and conduct of party. Phrases such as ‘non-binding and unenforceable’ can be used by the parties to indicate their intention of the non-binding nature of the Term Sheet. The supreme court of India emphasis upon action of parties and if the action reflects meeting of mind, then the contract is considered to be binding.[2] The Tribunal in a dispute between OYO and Zostel awarded the Term Sheet to be a binding document despite being clearly stated as non-binding in the preamble of Term Sheet, as the parties by its conduct showed their intention to conclude the transaction, which shows that parties waved the non-binding condition of the Term Sheet.[3] Therefore, the conduct which shows the intention of the parties is more important than the language used in the Term Sheet and it should not contain closing obligation, fulfilment of it convert the non-binding to binding document. The supreme court observed the Term Sheet does not denote the binding relationship between the parties but while interpreting it during a dispute, the total circumstances have to be seen and the Term Sheet is binding only if the intention to bind is crystal clear from the Term Sheet.[4]
The following judgement throws light upon the binding nature of the TS.
1. Dresser Rand Vs Bindal Agra Chem Ltd. AIR 2006 SC 871
2. Rajasthan Coop Dairy Federation Ltd Vs Shri Mahal Laxmi Mingrate Marketing Services Ltd. AIR 1997 SC 66.
[1] Insolvency & Bankrupcy Code (IBC), 2016.
[5] Rickmers Verwaltung GmbH v. Indian Oil Corporation Limited, AIR 1999 SC 504
[3] Amrit Mehta, ‘Why deal term sheets should not be taken lightly’(15 April 2021)< Why deal term sheets should not be taken lightly | Majmudar & Partners (majmudarindia.com)> https://www.majmudarindia.com/insight/amrit-mehta-why-deal-term-sheets-should-not-be-treated-lightly/
[4] South Eastern Coalfields Ltd & Ors Vs M/s. S. Kumar’s Associates AKM (CIVIL APPEAL NO.4358 OF 2016) (DOJ 23th July, 2021)
Author Bio
